The United States Supreme Court might give Puerto Rico the help it needs

On March 22nd, a truncated Supreme Court heard the oral arguments in Puerto Rico V. Franklin California Tax-Free Trust, which challenges a local law that relieves cash-strapped utilities on the island in order to help them meet their obligations to their creditors.

At the heart of the case lies a 1984 amendment to federal bankruptcy law that categorically denies U.S. territories from seeking bankruptcy relief because they are not states. Puerto Rico, embroiled in a 70 billion dollar debt crisis and with federal protection precluded, had no other option but to create its own law–the Recovery Act. Under this law, Puerto Rico’s embattled utilities could enter bankruptcy and restructure their debts. Much to the anguish of Puerto Rican lawmakers, the 1984 amendment also prohibits states from passing their own debt restructuring laws. Puerto Rico is defined as a state when it comes to debt restructuring, laying the groundwork for the arguments made on behalf of the island’s creditors.

The dynamics of the case are unique, given the truncated Supreme Court that heard it. Justice Antonin Scalia died in February, with no replacement confirmed as of yet. Justice Samuel Alito recused himself from the case, as he has a conflict of interest centered around his investments on the island. With two conservative justices excluded from the case, the seven-member court has a slim majority in favor of its liberal wing.

During oral arguments, all eyes were on the four liberal justices as key players in swaying the case in Puerto Rico’s favor. Justices Elena Kagan and Stephen Breyer were initially skeptical, seeing the creditors as having a stronger case. Justice Breyer doubted that bankruptcy law gave the island the same rights as states, saying that it was like comparing airplanes to horses.

Christopher Landau, Puerto Rico’s lawyer, argued that the 1984 amendment was nonsensical if it is interpreted to bar the island from seeking federal relief and creating its own local solution. In representing the creditors, lawyer Matthew McGill argued that the provision prohibiting local debt restructuring included Puerto Rico despite its territory status given the provision’s language.

McGill’s arguments, however, were principally opposed by Justice Sonia Sotomayor. Arguably the island’s biggest supporter as the daughter of Puerto Rican parents, Sotomayor questioned McGill’s assertions in doubting Congress’s intention of preventing Puerto Rico from enacting local emergency legislation in the absence of federal protection. Justice Sotomayor frequently interrupted Mr. McGill to present her challenges to his interpretation of the law.

Justice Ruth Bader Ginsburg resonated with the sentiments brought up by Justice Sotomayor while casting doubts on McGill’s assertion that the Congress would intend to put Puerto Rico in an impossible situation.

The sole member of the conservative wing of the court to speak was Chief Justice John Roberts. He asserted that it was within the realm of rationality for Congress to have one system for states and to require territories, like Puerto Rico, to seek legislative relief.

Despite initial doubts, all four liberal justices signaled openness to the idea that the 1984 amendment did not exclude Puerto Rico from enacting its own debt relief legislation.

A ruling is not expected until June. However, Puerto Rico’s embattled government has every reason to hope for a sympathetic decision. With the artificial four liberal justice majority seemingly leaning in favor of the island, Puerto Rico may be on cusp of some desperately needed relief.